Question

Balloons By Sunset (BBS) is considering the purchase of two new hot air balloons so that it can expand its desert sunset tours. Various information about the proposed investment follows:  

Initial investment (for two hot air balloons)	$	525,000
Useful life		9	years
Salvage value	$	57,000
Annual net income generated		43,575
BBS’s cost of capital		10	%

Assume straight line depreciation method is used.
  
Required:
Help BBS evaluate this project by calculating each of the following:  

1. Accounting rate of return. (Round your answer to 1 decimal place.)

        

2. Payback period. (Round your answer to 2 decimal places.)

         

3. Net present value (NPV). (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)

         

4. Recalculate the NPV assuming BBS's cost of capital is 13 percent. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round the final answer to nearest whole dollar.)

    

Answer 1

Ans:

Answer 1.

Average Investment = (Initial Investment + Salvage Value) / 2
Average Investment = ($525,000 + $57,000) / 2
Average Investment = $288,500

Accounting Rate of Return = Annual Net Income / Average Investment
Accounting Rate of Return = $43,575 / $288,500
Accounting Rate of Return = 0.1510or 15.1%

Answer 2.

Payback Period = Initial Investment / Annual Net Cash flows
Payback Period = $525,000 / $95,575
Payback Period = 5.49 years

Answer 3.

Net Present Value = -$525,000 + $95,575* PVA of $1 (10%, 9) + $57,000 * PV of $1 (10%, 9)
Net Present Value = -$525,000 + $95,575* 6.1446+ $57,000 * 0.3855
Net Present Value = $84,244

Answer 4.

Net Present Value = -$525,000 + $95,575* PVA of $1 (13%, 9) + $57,000 * PV of $1 (13%, 9)
Net Present Value = -$525,000 + $95,575* 5.4262 + $57,000 * 0.2946
Net Present Value = $10,401

Notes;

Initial Investment = $525,000
Salvage Value = $57,000
Useful Life = 9 years

Annual Depreciation = (Initial Investment - Salvage Value) / Useful Life
Annual Depreciation = ($525,000 - $57,000) / 9
Annual Depreciation = $52,000

Annual Net Cash flows = Annual Net Income + Depreciation
Annual Net Cash flows = $43,575 + $52,000
Annual Net Cash flows = $95,575

Hope This Helped ! Let Me Know In Case of Any Queries.